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Income Inequality in America: What We Should Be Doing About It

Recent studies are finding that inequality is not just a matter of ethics or justice, but a serious economic issue contributing to many of America’s current financial problems.

Inequality makes an economy inefficient and unstable, and limits the opportunities and mobility of its citizens. Many economists now suggest that we must reform our treatment of, and tax policies towards, big businesses and high net worth individuals, as well as reform a globally uncompetitive education system, if we hope to unlock our nation’s suppressed economic potential.  

Some facts about inequality in America:

- The top 1% of Americans now have 19% of the nation’s income, a share that has doubled since 1980.
- The rising tide has lifted a few boats significantly, and the rest hardly at all: Since 1979, the average income of the top 1% has more than tripled and their share of pretax income has doubled; in the same time span, the bottom 80% has lost pretax income share and realized only 20% income growth.
- The poorest fifth of households have an average income of $20,510, while the richest fifth have an average income of $164,490. That is eight times as much.
- The United States has more income inequality than Pakistan and the Ivory Coast.

New research is challenging economists’ traditional view that inequality is a necessary evil for an efficient capitalist society. Nobel Prize winner Joseph E Stiglitz leads the charge in his 2012 book The Price of Inequality, concluding that unequal societies are inefficient and tend to have unstable, unsustainable economies. A 2011 International Monetary Fund study agrees and adds that inequality tends to cause economic volatility. Stiglitz further argues, echoing a point raised by economist Christopher Brown of Arkansas State University, that income inequality hinders consumption spending and therefore causes “a shortfall in aggregate demand.” Harvard Business School economist David Moss has added that with the growing inequality, the richest have been absorbing the economy’s growth, leading to a stagnation felt by most income levels.  

Inequality also limits opportunity. In a Center for American Progress report, University of Ottawa economist Miles Corak argued that high inequality results in low economic mobility, even between generations. Stiglitz further argues that America has the least opportunity of any advanced industrial economy. In essence, with our current levels of inequality, the American Dream is just that – a baseless fantasy.

What can we do about it?

Joseph Stilgitz and New York University professor of economics Nouriel Roubini, among others, agree that higher taxes, particularly for the upper-middle class and up, will help even things out, thereby “unlocking the U.S. economy’s growth potential in a sustainable way.” They, along with billionaire Warren Buffett, additionally agree that the government should limit the tax breaks, subsidies, and loopholes allowed to the major energy, agri-business, pharmaceutical, and financial companies. In Roubini’s words, the government should make sure, “corporations and individuals whose income is derived from investments pay taxes commensurate with the benefits they get from the US citizenship.”

Many economists also agree that more investment in education is necessary to make America more competitive in the future. The United States currently ranks 17th in the world among developed nations in overall education and 25th in math and science. There is no magic bullet to improving education (allocating more resources, for example, does not correlate with better results), but a societal and federal focus on education reform is clearly necessary.

Inequality is not a “necessary evil” for a capitalist country – it is an unstable, unsustainable economic drag that makes our country more vulnerable to stagnation and volatility. It suppresses the American Dream of equal opportunity and economic mobility, making us less competitive globally. Like all complex problems, the solution will be extremely complex, but three glaring errors must be addressed immediately: the flawed tax system, policies that consolidate control in the country’s biggest companies and richest people, and a pathetically uncompetitive education system. 

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